Returns On Capital Are Showing Encouraging Signs At Newmark Security (LON:NWT)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Newmark Security (LON:NWT) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Newmark Security:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.024 = UK£248k ÷ (UK£17m - UK£6.1m) (Based on the trailing twelve months to October 2022).

Thus, Newmark Security has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 12%.

View our latest analysis for Newmark Security

Historical performance is a great place to start when researching a stock so above you can see the gauge for Newmark Security's ROCE against it's prior returns. If you're interested in investigating Newmark Security's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Newmark Security Tell Us?

Newmark Security has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 2.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Newmark Security is utilizing 20% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 37% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Newmark Security's ROCE

Long story short, we're delighted to see that Newmark Security's reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 29% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Newmark Security does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are potentially serious...

While Newmark Security isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.